Weathering the Fallout

The world took the fall of the pound with considerable calm. Predictably, 22 other nations devalued their currencies --generally by amounts in line with Britain's painful decision to shrink the value of her pound by 14.3%, from $2.80 to $2.40. The world's major trading countries--the U.S., Japan, Canada, Australia and the Common Market--rerained from retaliatory devaluations. The pound steadied on the money market and comparative tranquillity replaced the turmoil of the week before.

As a symbol of U.S. readiness to defend the dollar, the Federal Reserve Board raised its basic interest rate from 4% to 4 1/2%, and major commercial banks seized the occasion to lift their own minimum charge for borrowing from 5-c-% to 6%. Watching the minimal extent of the fallout, Treasury Secretary Henry Fowler pronounced himself "very encouraged" over the dollar's performance against the resulting speculative pressure in foreign exchange markets. The biggest effect--accompanied by some temporary alarums--came in the gold market. Speculators poured buy orders into the eight-nation London gold pool. In a few hours, they snapped up an estimated $23 million worth of the metal. On Thanksgiving, sales not only shot up to a record $112 million in London, but the gold rush also spread to Paris and Zurich. The pressure, mainly from Europe and the Middle East, continued to mount on Friday, but the pool dug into its reserves to provide enough gold to satisfy all purchasers. France, in what some money men regarded as part of Charles de Gaulle's mischiefmaking, leaked the news that it had not participated in the gold pool since last June. By week's end, some European bankers estimated that the drain on the gold pool had reached a total $350 million.

Even this flurry had no lasting negative effect on the world's stock markets. Share prices wobbled in London and slumped in Paris only to rally again; in Zurich the rebound was strong enough to lift the market 5% by week's end. On the New York Stock Exchange, after some nervous selling in the first hours of Monday's trading, a strong surge of buying sent the Dow-Jones industrial average up 15.49 points to close at 877.60, its high for the week.

Firm Price. The dollar is the only currency of a major world power that has escaped formal devaluation since the end of World War II. The U.S. supplies more than half of the gold in the London pool which was set up in 1961 to help stabilize the price of the metal within a few cents of its official U.S. price: $35 per oz. For 33 years that fixed price has been the cornerstone of the free world's international monetary arrangements. The U.S. is pledged to swap gold for dollars, at that price, to any foreign government that demands it. The dollar's standing as the world's chief reserve currency rests on that unique commitment, which makes the dollar as good as gold. But the commitment also means that any rise in the price of gold above $35 per oz. amounts to a devaluation of the dollar, and-- very probably--global financial chaos. As he had the week before, President Johnson last week vowed again that the U.S. will support the price of gold at $35 per oz.

When the world's monetary arrangements were revamped after World War II, the U.S. stock of gold seemed inexhaustible. Now the position is not that comfortable. After a decade of continuous balance of payments deficits, foreigners today hold some $27 billion worth of dollars, more than twice the $13 billion of gold in U.S. hands. Technically, $10 billion of that hoard is frozen as legal backing for the nation's outstanding currency. It is nonetheless available to meet foreign demand because the Federal Reserve can suspend the statutory requirement that U.S. currency be 25% backed by gold. Last week's flurry in gold, as well as the other aspects of British devaluation, renewed both hopes and demands among businessmen that the U.S. move swiftly to its obvious, anti-inflationary dollar-defense line: raising taxes, cutting spending, or both (see THE NATION).

Ultimately, the dollar's strongest underpinning of all is the sturdy U.S. economy. With a favorable trade balance averaging $6 billion a year, the nation has run into dollar-threatening balance of payments trouble only because of foreign aid, overseas investment and the Viet Nam war. Despite all the speculation, maintained Chairman Alfred Schaefer of the Union Bank of Switzerland last week, "the dollar is strong enough to ride it out--provided that it is well defended."

Secret Talks. Britain's third devaluation in 36 years was cannily crafted to cause a minimum of commotion throughout the free world. Prime Minister Harold Wilson's Labor government carefully scaled the size of its move to produce a small response. Anything more than a 15% devaluation, the British were warned in the delicate, secret negotiations that preceded it, would have impelled France, Belgium and The Netherlands to mark down their money in retaliation. Had that occurred, the resulting chain of devaluations might have ripped the world's monetary system apart, and perhaps even caused a prosperity-wrecking slowdown in world trade (as happened after 1931). Moreover, only with limited repercussions could Britain gain the necessary time to repair its own floundering economy and increase exports to bring its trade deficit into balance.

Apart from causing interest costs to rise, the mini-pound should benefit U.S. consumers. However, the price of British goods shipped abroad will fall not by the full 14.3% devaluation but from zero to about 10%, depending chiefly on how much of the final tab represents transportation, import duties, U.S. distribution and profit markups. Auto dealers expect to cut prices of British cars by 5% to 10% within weeks. On the other hand, importers predicted that the cost of a bottle of Scotch will drop only a few pennies--after the Christmas holidays. Devaluation will shave the profits of some American-owned firms with large British operations. Food-packing H. J. Heinz, for one, figures on a 16-c--a-share decrease in its earnings; yet altogether, predicted Heinz President R. Burt Gookin, devaluation will mean "no more than a ripple in the U.S. economy."

Denmark Did Less. Of the 22 countries that also cut the value of their money, most were small, sterling-area nations whose fortunes depend on their sales to Britain, or to other devaluing countries. Sixteen precisely matched the 14.3% British devaluation: Barbados, Bermuda, Cyprus, Fiji, Gambia, Guyana, Israel, Ireland, Jamaica, Malawi, Malta, Mauritius, Nepal, Sierra Leone, Spain and Trinidad and Tobago. At first, Hong Kong lowered the exchange value of its dollar by a like amount, but the price of food (mostly imported from mainland China) and other goods promptly jumped between 7% and 20%, stirring so much discontent among the crown colony's largely Chinese population that some officials feared renewed political violence. At midweek, the Hong Kong government backed down by cutting the devaluation to a mere 5.7%. In Malaysia, which took the curious step of devaluing its old, but still circulating, sterling-backed currency though not its new gold-backed dollar, eight were killed and 137 hurt when a protest demonstration erupted into a furious battle between Chinese and Malays in Penang. The Government feared that, with Communists doing all they could to take advantage of the situation, the disturbances might spread across the country.

Denmark devalued less than Britain: 7.9%. It was a half measure intended to help Danish farmers keep their vital outlets for butter and bacon in Britain while penalizing its much larger but import-dependent industries as little as possible. New Zealand, with its whole economy already weakened by falling wool prices, devalued 19.45%. Ceylon devalued 20%, and at week's end tiny Iceland took the biggest cut of all: 24 1/2%.

The Larger Sense. Devaluation may enable Britain to boost its exports (notably autos, appliances and aircraft) enough to erase a quarter of its trade deficit, but it will hit the pocketbook of every Briton. Grocers warned that food prices will rise at least 5%, starting with imported fruit, meat and vegetables. The cost of living normally jumps when food-importing Britain devalues. This time the price increases seem likely to touch off a new round of wage demands that Prime Minister Wilson, no longer armed with pay-freeze powers, will have trouble restraining. Promising that his complex web of economic restrictions and new taxes will somehow enable Britain to raise its output, cut unemployment and limit inflation to 3% next year, Wilson last week rebuffed Tory efforts to topple his government.

In and out of Britain, many industrialists and financial analysts voiced doubts as to whether the medicine was strong enough to cure Britain's deep-seated economic ills. In a larger world sense, the far more important question was whether the dollar would show signs of weakening. At week's end the evidence clearly indicated that it would hold firm.

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